HELENA – Auditors looking at the state’s beleaguered pension system said Thursday they have found cases where salary hikes just before retirement spiked pension payments.
Legislative auditors say a sample of retired employees found dozens of cases where unexpected salary hikes at the end of a career drove up the payouts despite controls in place aimed at limiting such “pension spiking.” Just eight specific cases analyzed by auditors found the inflated pensions cost the state $1.75 million.
The auditors reported to a legislative interim committee that the practice appears limited and doesn’t have much affect on the pension system’s billion-dollar solvency problem — but it can provide a big benefit to the employee getting the increase.
“For individual members, benefit inflation can represent a significant financial advantage, though our analysis indicates the practice is limited and would not likely affect the actuarial soundness of the retirement systems as a whole,” the Legislative auditors wrote in a report. “However, when individuals engage in practices which result in benefit inflation it can create a negative perception of the retirement system by members who are unable to achieve similar results and by the taxpaying public.”
The state-run Teacher’s Retirement System faces a long-term funding gap of $1.5 billion, while the Public Employees Retirement System faces a gap of about $1 billion. The value of both systems plummeted during the dramatic stock-market decline of 2008.
The auditors only sampled the pension system and did not look for a total cost associated with the issue.
A look at specific cases showed several ways salary can go way up at the end of a career. In one, an employee worked a lot of overtime and increased the expected pension benefit from $2,850 a month to $4,219 a month. In another case, an elected legislator, which is just a part-time job, took a full-time state government job and increased an expected benefit from $453 a month to $2,073 a month.
The Legislative Audit Division said they did not have employee names in the cases since they assigned a tracking number to data they compiled.
Lawmakers meeting next year are expected to look at the “pension spiking” and other larger fixes — such as dramatically changing benefits for new hires. One proposal aimed at easing the salary spiking problem would base benefits on employees’ last five years’ of salary instead of the last three.
Auditors said the spiking causes fiscal problems for the system because contributions are based on an employee’s earnings over an entire career. The system cannot keep up with huge increases in the last few years of employment.
Pension managers agreed new laws and controls are needed.
“Salary spiking has been an issue that the Teachers Retirement System has addressed over the years,” said Teachers Retirement System director David Senn. “We will continue to address that.”